Thursday, September 25, 2008

Here And Now: "Something To Look Forward To..."

Is it time to start preparing for the next boom-bust cycle?

I can remember sitting in a graduate economics course back in the fall of 2001 that was being taught by a very bright man, who, like our current Fed Chairman, held a degree from MIT. However, unlike Dr. Bernanke, our professor actually understood the effects of monetary inflations.... The topic was growth in the money supply and the lagged effects that it was going to have on the economy. At that time, the various commodity indices were near multi year lows, oil was trading around $20 per barrel, gold was forming a base between 250 - 300, the US Dollar was at multi year highs and forming a top, and the stock market had begun a bear market after hitting all time highs earlier in the year.

The Real estate bubble was about to launch into full blast mode, and of course, commodity prices would then rally. The discussion centered on criticism of then Fed Chairman Greenspan and government(s) in general. We were discussing the money supply, inflation and financial bubbles. He (our professor) was discussing recent increases in the money supply and deficit spending and the effect it would have on inflation and frustratingly compared the then current situation to the early 1970's and said..."that's something to look forward to..."

Such is the flawed nature of our governmental/economic/social institutions.... The point of the lecture in that class was not to explain why bubbles occurred - that was easy - financial bubbles are an effect of an inherently flawed system..... The more important point was that when we got out into the real business world we would need to know how to not just survive them, but exploit and prosper from them.

In the fall of that year, we all knew it was a short matter of time before the country went to war. In September of 2001 we did not know which specific country, (now countries) was going to be invaded, we just knew that the government was going to make someone pay for what had happened, even if its (long term) foreign policy was the indirect cause. It was becoming obvious what would happen - the government would expand and go into debt, the Fed would print more money, the USD would decline, inflation would accelerate.

Clearly, we are presently in the bust phase of the most recent cycle, but if the above graph is any indication of what the future will bring, the seeds of the next boom-bust cycle are currently being planted. Combine this with yet more increases in moral hazard due to another bailout and it is almost inevitable. Yes, there are risks of a long drawn Japanese style decade long recession, but I am of the view that we will see even more and larger bubbles in the future. It may be about 2-3 years away because the effects of this bust need to be worked through, but the next bubble will come, and for reasons that I will get into in the future it will likely be a bubble that involves equities (of course, the immediate and intermediate trends for equities is down). -John Bardacino